HP Shares Slip Despite FYQ3 Beat; Raises Year EPS View

By

Tiernan Ray

Aug. 23, 2017 4:08 p.m. ET

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HP Inc. chief executive Dion Weisler.
Illustration:
HP Inc.

HP Inc. (HPQ) this afternoon reported fiscal Q3 revenue and profit that topped analysts' expectations, and raised the bottom end of its forecast range for its earnings for the full year, sending its shares initially higher in late trading before they reversed course and declined.

As costs have risen globally for things such as DRAM memory chips, HP was able to "re-price" some products, meaning, getting higher prices, to try to "keep ahead of" component cost increases, but those costs continued to eat into its profit in the quarter.

Chief executive Dion Weisler and CFO Cathie Lesjak were kind enough to speak with me by phone following the report.

"I think the way to put it simply is, this quarter saw outstanding execution of our strategy," said Weisler.

He cited as the "main points" the "stabilization" of the company's print supplies revenue a quarter earlier than the company had led the Street to believe; a double-digit percentage total revenue growth; non-GAAP EPS earnings "at high end" of the company's forecast range; and free cash flow of $1.7 billion."

"I couldn't be any more pleased with our performance," said Lesjak. "It was another beat and raise." She added that the growth in the company's sales of printer supplies, rising 10%, but about 2% after adjustments, "is going to surprise the Street a lot." Weisler said HP is expecting supplies to be "flat to up slightly" this quarter.

Revenue in the three months ended in July rose 13%, year over year, to $13.1 billion, yielding EPS of 43 cents, excluding some costs.

Analysts had been modeling $12.299 billion in revenue and 42 cents per share in net income.

HP emphasized that its GAAP earnings per share, 41 cents, beat its forecasted range of 36 cents to 40 cents.

HP's non-GAAP operating profit margin slipped from 9.4% a year earlier to 7.7%.

The company's personal computer unit saw sales rise 12%, and would have been up 13% in constant-currency terms. Operating profit margin in the unit was 3.7%.

HP CFO Cathie Lesjak.
Illustration:
HP Inc.

Revenue from printing products rose 6%, or 7% in constant currency. That included a 1% rise in units of printing hardware sold, lifted by a 1% rise in consumer models, and flat sales of commercial models. Supplies revenue rose 10%. Operating profit margin was 17.3%.

For the full year, the company sees earnings per share in a range of $1.63 to $1.66, excluding some costs. That is an increase in the bottom end of the range, from a prior range of $1.59 to $1.66.

Asked about the rise in the cost of supplies for the entire industry, Lesjak said "as we had expected, costs continued to increase in Q3," adding "They were a headwind to operating profit, year over year."

She noted the company was still able to increase operating profit for PCs from quarter to quarter by re-pricing and by taking other measures such as improving "productivity":

We had some pricing actions, but it wasn't enough to overcome the commodity costs and currency headwinds. So you saw a decline, year over year, in operating profit but actually up sequentially 50 basis points. By overcoming currency headwinds and productivity increases started to pay off. Sequential improvement was a bit better than normal seasonality. We expect costs continue to increase in Q4, though probably it grows at a lower rate.

Weisler had his own thoughts on the commodity manner, saying "We've got to stay out in front of these cost increases," and that HP had "acted faster than competitors because we saw it earlier than them, and we didn't get caught behind the curve."

HP had "been exercising strategic options with our balance sheet to secure inventory," but also "doing the hard work of re-pricing," he said.

Suppliers appreciate when we are predictable. But for customers it's very hard thing to get in front of the customer and have that tough conversation. We did that work customer by customer. Value of innivaoitn in our pdoucts. Customers value the sprinkles of magic we are providing. We adapt solutions with customers, being accommodative. They understand and we've been able to fairly successful preprice.

In other areas of the report, Weisler noted that it was the "second quarter of growth in both printing and personal systems," citing double-digit percentage growth in the Europe, Middle East and Africa" region (EMEA), and Asia Pacific, and "strong" growth of 8% in the Americas region.

"What's more encouraging," he added, "is how we are going about doing it, which is consistent with the power of our products and our innovation."

"This was the third quarter in a row of PC growth being double digits across all markets."

Added Weisler, "We outgrew the market in terms of unit growth by 9.5 points, and we are taking profitable share out of our competitors, and showing the best innovation in decades." HP's sales of notebooks computers rose by 16%, year over year, while workstation computer sales were up 11%. Lesjak noted that desktop computer sales had been declining previously, "and they grew this quarter as well."

On the printing side, Weisler said results were "really encouraging," noting it was the second quarter in a row of growth in the A3 market, "across both hardware and supplies," said Weisler, including in the "A3" market, a relatively new market for HP, where it is selling commercial copiers for the first time, and where it acquired assets last year from Samsung Electronics (005930KS). It was only the second of two quarters where HP has had a "full" A3 portfolio, he noted.

In another new area for HP, 3-D printing, "we launched our products in APJ (Asia Pacific and Japan]," said Weisler the "world's largest manufacturing market," and HP now has 45 resellers globally selling its 3-D products.

"I think the most interesting and noteworthy point is that shipments are accelerating both with new and repeat customers," he added, with existing 3-D print customers coming back to buy additional machines.

HP shares were initially up about 14 cents, or 0.7%, at $19, in the after-hours session, but then reversed course and are now down 8 cents at $18.78.

Facebook shares drop almost 7% on Friday's disclosure of mishandling of user data by the consulting firm Cambridge Analytica, KLA-Tencor buys fellow chip equipment maker Orbotech, Deutsche Bank analysts are bullish on fiber optics name II-VI but negative on Arista Networks, GrubHub stock is getting pricey according to Stifel analyst John Egbert, Fitbit finds a new believer in Craig-Hallum's Alex Fuhrman, ex-chairman Paul Jacobs of Qualcomm is hoping analysts will vote in sympathy with him at the company's shareholder meeting on Friday, Dell topped server sales in Q4 and bumped aside Hewlett Packard Enterprise, Google's Diane Greene is mulling a big acquisition to boost the company's cloud services, Apple is moving forward with its own display technology called "micro LED," and Oracle is set to report results after the closing bell.

"While it's background noise for investors in the near-term, with the News Feed overhaul and other actions that Facebook has implemented over the past few months, its clear with more 'heat in
the kitchen from the Beltway' that further modest changes to their business model around advertising and news feeds/content could be in store over the next 12 to 18 months," analyst Daniel Ives wrote.

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